Growth Is Not Enough

Imagine if Asia—a place where roughly 20 percent of the population still lives on $1 per day—could largely rid itself of abject poverty by 2020. Such an achievement would crown a regionwide boom that was launched with Japan's rise from the embers of World War II, and is driven today by the dynamic growth of China and India. The possibility is within reach, according to a new report by a blue-ribbon panel that includes Sony's retired group chairman, Nobuyuki Idei, and former U.S. Treasury secretary Lawrence Summers. Their paper, entitled "Toward a New Asian Development Bank in a New Asia," is not a work of rose-colored conjecture. Indeed, it makes the case that Asia won't attain this dramatic goal unless there's a sea change in the way it does business.

The study's main thrust is simple enough: growth, in and of itself, is no longer enough. The current development model has rendered the region over-dependent on export-led manufacturing, flush with foreign reserves that strain weak financial systems, and burdened by yawning income gaps and widespread environmental degradation—side effects of policies crafted to post the highest possible growth figure every year at whatever cost. "Asia will have to come to grips with different kinds of problems related to growth," explains lead author Supachai Panitchpakdi, secretary-general of the United Nations Conference on Trade and Development and head of the World Trade Organization from 2002 to 2005.

That's no shout in the wilderness. In recent years, the shortcomings of Asia's old development strategies have come into stark relief across the region. India's watershed 2004 election, in which the then ruling BJP-led government lost power after delivering 8 percent growth, signaled deep grass-roots dissatisfaction about a widening urban-rural divide; the outcome put leaders from Jakarta to Beijing on notice that they, too, could pay a high price for not broadening the boom. Similarly, China's toxic rivers, smog, mass migrations and serious food shortages due to global warming all suggest that Asia's "grow first, clean up later" mentality is out of step with the gravity of the environmental challenge the region as a whole now faces. "I don't think we can take growth completely for granted," says Summers. "But the risks are less directly in terms of [Asia's] ability to achieve growth than they are on some of the things that may come alongside growth."

Changing that requires sweeping policy corrections, both for Asian governments and for the Asian Development Bank itself. More than just building roads and electricity grids (the stuff of traditional development aid), lifting poor regions now entails finding better ways to finance rural enterprises, creating nonfarm employment and "improving living standards in sophisticated and complex economies," the study argues. The development agenda will also increasingly need to be regional, not national, in focus. And in stark contrast to the historical pattern whereby development projects were bankrolled by OECD states, Asia's newfound wealth mandates a shift toward self-funding.

The ADB will still fund brick-and-mortar projects, to be sure. But it will also take up new issues like improving technology use, promoting public-private investment partnerships and encouraging financial reform. The region's reserves now exceed $3 trillion, much of which is lent back to Europe or the United States to fund debt-driven consumption (earning their respective governments near-zero interest). But thanks to factors as concrete as weak banking controls and as nebulous as regional distrust, most of that money still flows through London or New York rather than Tokyo, Hong Kong or Singapore. Keeping more of it in the region and spending it productively won't be easy. Banks, particularly in China, would need to broaden their lending to small businesses and consumers. India would need to change laws to allow investors greater rates of return on much-needed roads, railways, ports and power plants. Bond markets would have to mature to the point that businesses (or institutions like the ADB) could tap local savings pools to fund their projects. "Currently, all these Asian countries are exporting capital to OECD countries because they lack financial sophistication," says Justin Yifu Lin, director of the China Center for Economic Research at Peking University.

The bank is launching a variety of programs to help bolster Asian financial systems, and the study even proposes a truly radical notion: that the ADB could manage a portion of Asia's foreign reserves. In recent months, prominent economists in the region have floated the idea that current inflows into U.S. Treasury bills would be better spent at home. Lin, for example, argues that since the 1997-98 Asian financial crisis, reserves have ballooned so rapidly that "they do not serve the purpose of security, or intermediating trade." Already a handful of regional governments have created new funds modeled on Singapore's Government Investment Corp. and state-controlled Temasek Holdings to invest at home and in the region. Though it's politically sensitive, ADB money managers could well earn better returns than what Asian countries now garner from government bonds purchased in New York or London. "If they ask, we will certainly explore this possibility," says ADB president Haruhiko Kuroda.

Radical solutions aren't required just in finance. Environmental degradation is the single biggest factor that could inhibit the region's economic development in the longer term. The problems are massive. But so are the payoffs. If Asian leaders make the right moves, the study authors estimate that by 2020 per capita income could double to about $8,000, and the region would account for 45 percent of global economic activity, up from 35 percent today. "Ultimately, large countries with rapid growth rates, not external institutions, are going to define [Asia's] destiny," says Summers. Translation: reducing Asian poverty is now up to Asians themselves.